Let's Talk Taxes

Since it’s income tax day, let’s talk taxes. Of course nobody likes to pay taxes, but for Republicans, taxes are one of the great evils of the world (in spite of all the stuff they want to spend money on). And since they are in control in Washington, they are threatening tax reform once again, and if they can get the Freedom Caucus to fall in line, maybe they’ll be able to inflict some damage. And I mean damage.

You might remember last time the Republicans were in charge, we paid for two wars and Medicare Part D with tax cuts. I think that’s what they call “fiscal conservatism.” The arithmetic doesn’t work out very well, but if you get the ideology right, who cares about the math? There are always Paul Ryan’s magic asterisks to make all the numbers add up, sort of.

Then we had the Great Recession, which pumped up the debt to truly impressive levels. Of course, Obama came into office in the middle of this mess, so of course the Republicans tried to pin all the debt on him. The truth, of course, is that in a recession, you need government to step in and keep the ship afloat, and with so many people unemployed, tax revenues also drop precipitously, all of which creates more debt. Nevertheless, the “deficit scolds,” as Paul Krugman calls them, were out in force. The big issue for Republicans all during Obama’s first term and half of the second was the massive debt that was drowning America. What they never would admit is that if we hadn’t added a good deal of stimulus when things were awful, it would have gotten a lot worse. Obama generally gets very high marks for his handling of the economy during the late Great Recession. But accumulating debt under those circumstances is pretty much unavoidable.

Now that the economy is humming along, though, we should be trying to build up a surplus. You’d think that would be a high priority for so-called fiscal conservatives. Instead, what do we hear from the Republicans? Well, Trump wants a $1 trillion investment in infrastructure. This would actually be a good idea. Our infrastructure is crumbling. But how do the Republicans propose to pay for this (and other conservative priorities, such as building up an already bloated military and constructing a totally unnecessary wall on half of our southern border)? You guessed it. With tax cuts that primarily benefit the wealthy. Is anyone surprised by this? Of course not. It’s how Republicans operate. They accuse the Democrats of “tax and spend.” All I can say is that “tax and spend” makes a whole lot more sense than “cut taxes and spend.” For some reason, when the Republicans are in power, the debt doesn’t seem to matter at all. Oh, Trump wants to slash spending in important but relatively inexpensive departments and agencies, but all those savings would go to the military, so the net effect is zero. And this week he has actually admitted that repealing Obamacare is really about setting the stage for “tax reform.” It’s not about providing health care for Americans. It’s about tax cuts. At least he’s honest about one thing.

I do agree with the deficit scolds in principle, if not in either timing or methodology. Our debt is too high and can and should be reduced. But it cannot be reduced through tax cuts. That is just obstinacy and absurd ideology and arithmetic deficiency. To put this in some sort of historical perspective, let’s look at top marginal tax rates over time. To save space, I will list only the years when the rate changed.

1940	81.0%
1942	88.0%
1944	94.0%
1946	86.45%
1948	82.13%
1950	84.36%
1951	91.0%
1952	92.0%
1954	91.0%
1964	77.0%
1965	70.0%
1968	75.25%
1969	77.0%
1970	71.75%
1971	70.0%
1981	69.13%
1982	50.0%
1987	38.5%
1988	28.0%
1991	31.0%
1993	39.6%
2001	39.1%
2002	38.6%
2003	35.0%
2013	39.6%

A couple of things are obvious. First, when we needed to pay off our World War II debt, we weren’t afraid to require more of the wealthy. Second, if you look at the national debt, it predictably began to rise with the Reagan tax cuts of the 1980s that took our top marginal rate from almost 70 percent to 28 percent. And once you cut taxes, it is extremely difficult to increase them. In spite of the massive debt, we’ve managed only a measly 4.6 percent increase in the past 14 years.

Hidden in this simplified chart are the myriad tax loopholes that combine with these nominal rates to produce effective tax rates for the wealthy that are quite a bit lower than these figures. Additionally, the capital gains tax rate is 15 percent, which applies to a large share of the income earned by the wealthy. This is why Warren Buffett complained about paying a lower tax rate than his secretary.

So, if we were really serious about reining in our massive national debt, we would enact laws to affect three different elements of the tax code. We would (1) increase top marginal rates to at least pre-Reagan levels, (2) get rid of loopholes that skew the system in favor of the wealthy, and (3) increase the capital gains rate to at least 35 percent, preferably higher. If you think this is drastic, well, just look at the debt we’ve accumulated by playing the silly supply-side game. We’ve been at it for 35 years now, and it doesn’t work. Time to deep-six this awful legacy of Ronald Reagan.

Now, another point about taxes. One piece of misinformation we hear quite often is that Americans are overtaxed compared to other countries. This is simply not true. The OECD (Organization for Economic Co-operation and Development) keeps track of total tax revenue in participating countries as a percentage of GDP. Here are the figures for 2015 (except for Australia, Japan, and Poland, which were unavailable, so I inserted 2014 figures).

Australia	27.8
Austria	43.5
Belgium	44.8
Canada	31.9
Chile	20.7
Czech Republic	33.5
Denmark	46.6
Estonia	33.6
Finland	44.0
France	45.5
Germany	36.9
Greece	36.8
Hungary	39.4
Iceland	37.1
Ireland	23.6
Israel	31.4
Italy	43.3
Japan	32.0
Korea	25.3
Latvia	29.0
Luxembourg	37.0
Mexico	17.4
Netherlands	37.8
New Zealand	32.8
Norway	38.1
Poland	32.1
Portugal	34.5
Slovak Republic	32.3
Slovenia	36.6
Spain	33.8
Sweden	43.3
Switzerland	27.9
Turkey	30.0
United Kingdom	32.5
United States	26.4
OECD Average	34.3

As you can see, of the 35 member countries, only Chile, Ireland, Korea, and Mexico pay lower taxes, on average, than Americans. We pay 7.9 percent less than the OECD average. We want government to do lots of stuff for us. We just don’t want to pay for it. So we’re not really overtaxed. We are 3.4 percent higher than we were in 2009, in the midst of the Great Recession, but that was an anomaly.

Finally, I can’t let income tax day pass without bringing up the fact that Donald Trump has broken his promise to release his tax returns. Of course his statements over time are a moving target. Now he claims that Americans don’t care, but a recent poll says otherwise. Three-quarters of those polled want him to release his returns. And there is probably good reason why he never will. It may have a lot to do with the Russian connection. We’ll really never know unless Congress, which has the power to do so, requests them from the IRS. Of course, this will never happen as long as Trump’s enablers control both houses of Congress. But the way things are going, that could change in 2018. Stay tuned.

Oh, and happy income tax day.